Wednesday, November 08, 2006

Calls of Note Part 4

Recent issues that have knocked the stock back (currently 41% off its high) reflect acceptable growing pains and more normalized comp store sales. This is eerily reminiscent of FY2003, which was a buying opportunity.

The reversion to the mean of comps in the shorter-term reflects a trend line that frankly is still good. Some of this is due to the sheer math of yoy comparisons, as well as WFMI's correlation with the rest of retail, in firm's view. The company is also reaccelerating new store openings. Square footage growth that eventually accelerates north of the 16% targeted level in FY07E is likely. With "normalized" comps of high single digits (say 8-9%) in FY08E, they forecast a secular sales (and earnings) growth rate that accelerates beyond 2007E's 13-17% target. Also, they speculate that macro is a factor (given other recent US retail trends, which have been relatively softer: a la Wal-Mart at 0.5%, Kohl's at 4.2%, Home Depot at -0.2%, Lowe's below the 0-2% range and Best Buy at 3% in the US for its latest quarter, Q206). Firm notes they have seen this before in FY2003 when Whole Foods slowed to 7% trends on 10% comparisons (now they're 6-7% on 13% comparisons). WFMI comps were directionally correlated with the rest of retail back then, and it proved to be a buying opportunity for the stock.

The stock is attractive at 26.3x 2008E EPS and 1.2x LTM sales.

Notablecalls: As regulars readers know, I don't like highlighting rating changes on this page but you just gotta love this one. The call is surely worth couple of points of upside in stock price.

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